An Unlikely Leader for a Clothing Retailer Selling to Plus-Size, Moderate-Income Black Women

In this podcast, Motley Fool host Mary Long caught up with James Rhee, the former CEO of plus-size fashion brand Ashley Stewart, a professor, entrepreneur, activist investor, and the author of red helicopter―a parable for our times: lead change with kindness (plus a little math), for a conversation about:

  • An unlikely turnaround at a retailer serving plus-sized, moderate-income black women.
  • Being kind versus being nice.
  • When liabilities can become assets and vice versa.
  • Real-world goodwill versus the accounting version.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on April 06, 2024.

James Rhee: What did I have? From my stomach, I said, well, I may be the least qualified person to run this company. True. I'm the last thing you all needed. True. I've never done this before. True. Then I said, but maybe if we can be kind and mathematically honest, we can figure out a way to get out of this.

Mary Long: I'm Mary Long, and that's James Rhee, a professor, entrepreneur, and the former CEO of Ashley Stewart. I caught up with Rhee for a conversation about his new book, red helicopter―a parable for our times: lead change with kindness (plus a little math). We had a conversation about leaving a company on the verge of liquidation. What corporate leaders often neglect to do when they make hard decisions and what goodwill can tell investors.

James you recently wrote a book; it's called Red Helicopter, and it tells a lot of stories. As I was reading, I was trying to categorize it myself, and its part business story, part memoir, part manifesto, I'd say. I want to talk about all three of those pieces and the intersection of them all. But maybe we start with the title and use that as a framework for the rest of our conversation and time together. Why a red helicopter? What does that represent to you?

James Rhee: For me, it was a story of just absolute clarity. I spent most of my life as a human being, investor, teacher, CEO. All you want to do is discover the truth. You just want the truth, and the truth is really hard to find, because it's putting all sorts of different frameworks and you learn things and you realize that maybe that's not always true. For me, Red Helicopter is a symbol of truth, of wisdom versus being educated. It lives in the same plane as physics and math, and music. These are things that are always true. For your listeners, it's a metaphor; they could have a different red helicopter story. For me, it was literally red helicopter where, when I was five, I got a toy as a gift. An unsolicited gift because I've been sharing my lunch with a boy who came to school without one, and dad wanted to reward me for it. He didn't even tell me why he was giving it to me, and I found out later why. It's a series of times when you think you're wrong. Did I steal it from school? Did my parents make a mistake and realize that in America, every public school kindergarten kid was supposed to get a toy? But in the end, truth, you have to get through all of the falsehoods and insecurities about being wrong. You have to find the truth and be determined to find the truth. That's what it's about.

Mary Long: Throughout the book, you talk a lot about rethinking what are tangible versus intangible assets. Let's maybe use that as a segue to talk about the business piece of the story. Red Helicopter again is in many ways, like a manifesto on how to balance business and life in the modern world. The book really tells the story of the reinvention of a company called Ashley Stewart, which is a clothing retailer. Primarily catering to plus-size, moderate-income black women. How did you, James Rhee, come to find yourself at the helm of Ashley Stewart?

James Rhee: For those of you who are picturing me, I'm 53 years old. At the time I did what I did, I was 42, 43. I'm a dude, and I am Korean-American. I had zero experience operating anything other than bussing tables. I was a longtime Boston private equity guy wearing a blue blazer and pleated khakis. Can you picture that guy? The most illogical person perhaps to come in and partner with thousands, if not millions, of plus-size, moderate-income black women to pull off something that I think people are only beginning to understand what we did now actually. It was something that I believed in the relationship that they had among one another. I thought they created a lot of "intangible greatness" in their communities. I was really long as an investor in my relationship with them. No matter what the world said and said, you all can't possibly get along. Ultimately, we had to devise a set of mathematical and operational schema that made that intangible, those unbelievable intangible things believable and tangible to the rest of the world.

Mary Long: Before you became CEO, you were attached to the private equity company that owned Ashley Stewart, and so how did you see all that, those relationships, how did you see all that from your position before you became CEO? Maybe what I'm getting at is, can you kind of walk us through that process, that in-between period where you're seeing where this company is headed and the distress it's in and you're thinking, I can do something here, to actually stepping in and saying no, I'm going to do something here?

James Rhee: I'm an activist investor, always have been. As a private equity guy, I own the companies that I invested in, majority-owned. Even as a passive investor, when I'm investing in public stocks, I take a pretty active position as well. I make phone calls, I talk to people, it's constant due diligence. I've been into the stores before we made the investment. I'd seen things and said, OK, this is really what is happening here. There's real relationships, very sticky relationships. Women coming in 2, 3 times a week, talking nothing about clothes, talking about other things. Very tied to church, very tied to parenthood, motherhood. These are third-rail spaces where you can't make this up, you can't buy things like this. It takes a lot of time. As Jensen Huang just talked about in the NVIDIA interview, it takes actually a lot of suffering actually and a lot of things you go through, and when they're suffering and something can provide joy and relief, there's a lot of value to that. I saw these things, and it brought me back to a place long time ago when I saw, frankly, my mother would suffer in this country. It reminded me of times when she didn't feel that great and she'd walk into a Korean grocery store. I could immediately see the change in body language. These very nuanced things, as much as I'm acquired guy went to Harvard Law School, this are things that will never appear in a spreadsheet. As an investor, I've always proactively went out and I went to the room. I would go to the place and see from my own eyes.

Mary Long: I don't want to dwell too much on the time before you became CEO, but I do want to paint a picture of what that looks like. It's really underscore the amazing transformation that actually Stewart did undergo. When you became CEO of the company, the business was a nightmare. It was unprofitable. It had already been through one bankruptcy. Vendors, as you describe, are hanging in the lobbies of headquarters demanding to be paid. There's a surplus of chemi source. Things are bad. Again before you stepped in. How did things get so bad there? Maybe there's a business lesson to be mined from the early mistakes of Ashley Stewart.

James Rhee: I think it goes back to the truth. In this case, it was not just the sort of, I think, poor operations, but let's face it, this was a female-focused, not size 2-focused, black women-focused business. I think it's fair to say that those are three things that are not as celebrated or as visible on Wall Street. I've lived on Wall Street; I can speak firsthand that that's the case. If you think about this as a metaphor, which is why the book is written as a parable, this was a enterprise slash community slash business that was not going to get the benefit of the doubt in terms of access to capital markets, financing, any of these things. I look at those opportunities as an investor as an opportunity to make a lot of money too. Because if no one's looking at them for artificial biases, I'll put my money in there all day long. That's what the positioning was.

Mary Long: When you first came to Ashley Stewart, it's supposed to be a six-month stint. Your primary task is to help avoid the second bankruptcy that the company is facing. Just take us back to day one on that job. What's the business plan? What's the plan of attack? What are you doing?

James Rhee: There wanting the job is me showing up with my big dimple showing and weirdly feeling completely free of a lot of the conventional investing paradigms or living paradigms. I was able to be a junior high school person again, in mindset. I had no credentials. Everything that I had credentialed up until that time were worthless. If you think about it, I was like the last thing that this company needed, and they got me. If you think about truth-finding as a theme here, I saw things very clearly. I know lenses are. It was much more of a, OK, I know that this company is about to liquidate; I know the hurricane that's about to hit this company because I'm part of that regime, by the way. What do we have here? By the way, gender, race, everything. It was so bad, as you mentioned before, I ended up having to hire a police officer to protect the employees in the parking lot when they went home. Amidst all this chaos, which, by the way, a lot of people feel that chaos now, in the real world today, what did I have? From my stomach, I said, well, I may be the least qualified person around this company? True. I'm the last thing you all needed? True. I've never done this before? True. Then I said, but maybe if we can be kind and mathematically honest, we can figure out a way to get out of this. That's what I said.

Mary Long: How do you face that hurricane of bankruptcy that was facing Ashley Stewart? Practically, what are the processes that you're going through day-to-day? You're talking to bankers, and then you're having to come back and communicate with the actual employees at this company what the future looks like?

James Rhee: Yeah. In this case, it was a second bankruptcy in three years and I think the better word is even it was facing liquidation. There was no chance there would be an organized bankruptcy. Company had no money, and no track record, and no goodwill in the deal community. In my role, and I do this often in life, I was a translator. I speak a lot of "different languages." It's not just like languages of countries, but language of finance, law, music, you name it. I speak those type of languages. I'm like, here's what the bankruptcy code is. This is what's practically going to happen. The restructuring advisor is technically working for the company, but let's face it, plays golf with the lawyers and the restructuring advisors, the other ones. The deck is stacked against us. I've read the employee base there, the WARN Act slowly and we sent out letters by one of them to hear it and to understand what it meant. It frankly stands in stark contrast to a lot of the behavior I see in our corporate environment today, where employees, they're blind-sided. They don't get the "truth." I've always had a lot more confidence and respect in people, when you tell people the truth, they generally don't panic. They rise to the occasion and they address things calmly and I think that always leads to better decisions.

Mary Long: You started your career as a high school teacher and you're a professor now, like being a teacher seems to be a through line throughout your life. You see that a lot in this book as you're having these really honest candid conversations with the employees of Ashley Stewart. Your whole thesis is to lead with kindness and that's definitely a parent that that's what you did throughout this time. But also especially at the beginning, you had to make some really tough decisions. Like you mentioned, you read the employees the WARN Act. You had to take tough actions when faced with this hurricane of liquidation. "I think you ultimately closed about 100 stores, had to decrease payroll." Today we hear lots of stories about layoffs, especially in the tech industry and things that are happening there. Based on your experience, what advice would you give to companies that are carrying out laughs and maybe let's say less humane ways? What advice would you give to those companies about leading with kindness and doing hard things in a kind and effective way?

James Rhee: I think that to answer that question, I just want to quickly define kindness here. I think most of your listeners know that it's very different from niceness. I spent a lot of time in this book defining kindness, actually directly and indirectly. Kindness is incredibly direct. Kindness maximizes someone else's agency. It's an investment in a person or an Orc, it's an investment in human capital. I just want to repeat, kindness is like not week, it's like relentless water. It's honest. That would be my advice. Yes, it is humane to do it. It is "considerate to do it." I also think the math part of the equation of what I always bring to the table is that when you are indirect with people, merely mouth, not telling the whole narrative, it creates an incredible amount of resentment, lack of trust. People start not focusing on their work and we've all been there, we've all worked in places where you start spending half your time gossiping or wringing your hands, preparing a resume. Again, I have much more hope respect for people that when you tell them the truth and you tell them, things are not great, for, we have to pivot. We will be making these decisions. We're going to solicit your feedback about what is the best way to pivot. It's a group buy-in. People have much more understanding that companies do have to make difficult decisions sometimes. Frankly, it is kind. Rather than letting someone linger for a year or two in an unproductive dead-end job, if you're able to work with them in advance and say, your skill sets, we utilize it fully here. Let's find you a better place. Why wouldn't you do then?

Mary Long: You lead with kindness and you have these tough conversations and eventually what was originally a six months state turns into seven years, at Ashley Stewart. When did your time at this company go from being a short-term turnaround to a long-term reinvention?

James Rhee: I want to impress upon your listeners. This was not some sort of preordained manifest destiny thing. After six months, I wanted to go home and the sole goal was to find money so that someone would buy the stores and I could go back to my private equity life. But no one came. I begged a lot, and no one came and I was disheartened. I had a choice to make. And this is about agency. The book is a lot about choice. I knew I was right about the business plan, about where the world was going, about my relationship with the women that we had developed. I called in some favors. It was like the movie, it's a wonderful life that I had caught a lot of goodwill on my balance sheet too, and people trusted me as a fiduciary and they're like, we know you would never do this unless you felt you were right. Part of that equation was, I had to be the one to execute on the plan as CEO. It wasn't just a oh, here's a business plan I wrote. Here's the math, here's the duration theory for the inventory. It's like running it like a hedge fund. I had to do it, and so I did. In retrospect, and some people identify with this. It's like it felt like to me, because it came out around the same time as we did this Hamilton, that it was a new score. It sounded different, the protagonists were a little bit upside down. I had to act in it. It wasn't just about creating the score. But I had to actually be in the play. My role in that play was "CEO." But in reality, it was not, the real CEO of that business. The reason why it works so well was that I have never been clear about why I was doing what I was doing. I wanted my friends, these women, I wanted them to win on their terms. It was a seven year period where I had not thought this clearly in so long. That's why it's also called Red Helicopters. That clarity of thinking.

Mary Long: A large part of this business plan that you develop and execute on as CEO is like rewriting and rethinking basic accounting principles. In the book, you refer to this as lemonade stand economics like it's truly going back to basics of what it is to build something as a child. Think about something as a child. As a part of this, you basically recategorize some of the company's assets and liabilities. Can you give us an example of an asset that was actually a liability or a liability that was actually an asset and that rethinking process?

James Rhee: Yeah, sure. First of all, it's just start off and remind everyone that accounting is completely made up. That's not physics, it's not gravity, it's just made up. It's a convention. It's nice to compare companies using accounting, but to do that empirically as the only way to value a company, I think it's limited. Here's one thing. Accounting 101, short-term asset, inventory is an asset. It produces future value from an operations perspective. I encourage all my companies, particularly at Ashley Stewart, we did this, it's a liability. I don't want it. You made the investment, now get it off your books. When you start teaching people this, it changes the entire behavioral apparatus and schema of your company. People are like, well, it's an asset, we want to keep it. I'm like, no, it's a liability. What do you want to do with liabilities? I'll get rid of them. Our inventory turns just went crazy, our asset productivity went crazy. Here's another example. Accounts payable to start with, keep it short-term. These are liabilities. No, they are. I get it we have to pay people back, but for me, our accounts payable, I measure that as a surrogate for vendor trust and our terms went from 0-60 days. A lot of our growth was purely on float and so we never had to issue capital to dilute our ownership base. We treated our vendors like they were part of a co-operative, it felt like a mutual system. I think we're experiencing that a lot, if I can go into a little bit of a tangent just, in current day. You're seeing that in terms of the declination in mutualism it gets very expensive. It's very difficult to get insurance now. When you have declined in mutualism and you want to have a go-it-alone economic model, it's very expensive. You're seeing that in auto rates, property rates right now.

Mary Long: A big focus at this red helicopter philosophy is not just kindness and math, but also agency. How did you get creative with equity and ownership to develop this culture where agency was really celebrated?

James Rhee: First of all, it was to define what agency is and to make sure that people understood that kindness helped create agency. You're creating decision-makers. A lot of cultures think that they encourage people to make decisions, but they don't. A culture of fear, no one wants to take accountability and risk, and be creative, to take a position that no one else takes. It's a lot of groupthink. That was the first thing. What is agency? It's certainly not monomaniacal like control, like manifest destiny where you know the results. That was the first thing. Second thing, after you do that, you start rewarding those type of behaviors. You don't get mad when people make wrong decisions, but they did it through the correct processes. You start really looking sharply at people who make lucky decisions and use flawed processes that are not repeatable over and over again. That's number one. Number two, from a compensation standpoint, we did not compensate and reward just revenue generators, which is very easy to do because sales go up, you reward. It's much more difficult to take the second step and say sales went up, but based on which capital? How much invested capital? Sales went up, but really was it your value-add? I think maybe it was more product design. When it tends to happen, you start rewarding people who actually do the root cause improvements in the business. It tends to reward people who create more longitudinal value add like product or it's UX, user experience, people who rarely get the sunshine because they're not directly generating sales, but they're doing everything that's creating the sales. I think that's a true meritocracy. That's how teams win in the long run.

Mary Long: I want to talk a little bit about goodwill too. This is also an accounting term. It shows up on the balance sheet as an intangible asset, but we think of goodwill in the accounting world as very different than the goodwill in the real world. How does real world goodwill translate into accounting goodwill?

James Rhee: Let's start with the real world goodwill. We all know what that is because we all cry at the end of it's a wonderful life. That's goodwill. That's something that he did over a long period of time, create a lot of goodwill. He made money while doing it by the way, he issued originated mortgages and did ran a savings and loan. He created a lot of communal goodwill and is his time of need, his wife, Mary, was able to make it manifest to him and he sought. It's a very literal example where goodwill was monetized. I'm pretty sure that the money that they stuff in his hat, those were non-recourse loans. [laughs] They didn't ask for the money back, so that's real goodwill and that's why we cry. We say, OK, in the business world, anyone who has ever been in a cubicle at midnight at an investment bank or buy side shop, you have built a model where the balance sheet did not balance and you basically created a plug called goodwill and the assets all of a sudden married up with the liabilities and equity. It's a completely made up accounting term. I write in the book that I tend to love to short companies that have a lot of goodwill on their balance sheet because it meant that they overpaid. They're showing artificial income statement grew up, but their balance sheets and mess, they'd probably over-levered so it's been an investment strategy of mine to look at that. That's the irony that I said in my TED talk, I said, how ridiculous that accounting uses the definition of goodwill in this way? There's so many other things like is accounting accountable? Then I play on the word balance in balance, [laughs] is that truly do you have real balance at work or balance at home? What the book also guides people's to say if you take that practical, it's like radical commonsense view. That businesses are comprised of people and people generally don't do well when they have cognitive dissonance and they have a certain set of values at home and a certain set of values at work. Could you create a system where the best types of behavior that you see at home or in your friendships were rewarded at work? Could you do that? That's what I think we did very well. As we discovered that, enrolled it out and longitudinally it required a rethinking of some basic accounting principles and Kinnaman just passed away recently. It's one of the reasons why he was so depressed actually, and said, I'm not sure systems one, systems two will ever be implemented in corporate America. I think we did for the seven years, it wasn't perfect, but we made tremendous strides in rewarding systems two thinking, not Systems One.

Mary Long: Our co-founder, David Gardner talks a lot about investing in the world you want to see. I think that it's fair to say that you're living embodiment of this, but of that, the course of actions that you took at Ashley Stewart really speak to that idea of investing in the world you want to see. What kind of a world do you want to see and are there any companies out there that you're excited about right now that are building that kind of a world?

James Rhee: I am a proud, second generation American citizen. My parents were both caregivers doctor and nurse who immigrated from Korea after the Korean war. I think I'm obviously slightly biased. I think that the United States of America is the greatest start-up that's ever existed, I really believe it. that founders principles and it's about agency, it's about Liberty and free markets. I'm living that life like this is something that I've three children, that I would like for this country do reminder the fact that civics and capital their hand in hand. You can't have an effective capital system without a accompanying civic system and I think that a lot of the debate that we're having right now, so , I think it's imperative on all of us, not just CEOs, but all of us and this is why I spent a lot of time with small businesses, like with the government as well, that you are accountable to your community with the actions you take. Just because you're working in a C Corp does not give you permission to act in an unaccountable way for your fellow humans. I found that over the long term that has created a lot more financial wealth as well, not to mention the emotional health of like when their women came to my dad's funeral. I'll never be able to repeat them for that. In terms of what I'm doing now, what Red helicopter is, it literally is a branded statement of the statement I just made and so I'm working with a lot of companies to help them achieve this and a lot of my focus tends to be on the smaller middle market companies these days because you have more of an ability to impact behavior in that way. By the way, not unironically, other than the big seven there have been some very healthy returns with small midcaps. You have the ability to create outsized returns because there's just less attention being placed on these companies.

Mary Long: James Rhee, the book is called Red Helicopter. Thank you so much for your time for the book, for the work that you've done. In business and academia, your resume is long and your success has been really wonderful to see unfold. Thank you so much for your time and we're glad to have had you on Motley Fool Money.

James Rhee: Thank you so much.

Mary Long: As always, people on the program may have interest in the stocks they talked about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long, thanks for listening. We'll see you tomorrow.

Mary Long has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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